How eCommerce is Leading a New Industrial Revolution (of sorts)

There is no shortage of predictions about the future of retail, both nationally and right here in New York City. While they may vary in their details, almost all of them share one basic premise: traditional bricks-and-mortar retail is doomed. It’s an opinion stated so frequently now that it borders on cliché. We would argue, however, that this view is short-sighted. There is no doubt that retail is going through a corrective period, a transformation that caught all of us off-guard when it began. Even when Amazon began to challenge bookstores like Barnes & Noble and Borders, the idea that they would revolutionize the retail industry entirely (and not only retail, as we’ll see in a moment) seemed unthinkable.

Before continuing, some perspective is required. Despite the fact that Amazon, who represented 43 percent of all online U.S. sales in 2016, and other newCommerce sites – a more appropriate naming, since as we’ll see presently, the lines have blurred between online and bricks-and-mortar shopping as omnichannel strategies continue to evolve – have enjoyed such wild success over the past decade or so, eCommercce still only represents 10 percent of all retail sales. What studies are showing is that even while many consumers may ultimately make a purchase online, they nonetheless desire the experience of a physical store – if the store is done right. It’s true, customers will be online while in the store, and they will be looking at other opportunities to purchase what they find in a store at a cheaper price elsewhere, whether at another physical location or online – yes, they will be looking up a retailer’s items on Amazon. That reality must be expected. And yet, most consumers still prefer to make that purchase in the store. So not only is bricks-and-mortar retail not dead, but it is essential to a retailer’s success. The perfect and deeply ironic proof of this is the fact that Amazon is now opening physical stores across the country, including a flagship at Manhattan’s Shops at Columbus Circle opened in May 2017.

There is no doubt, of course, that eCommerce has had an enormous impact on the way we shop. While physical stores still account for 90 percent of all retail transactions, that 10 percent of eCommerce direct-to-consumer sales is now at $400 billion in the United States, and is growing at 15% per year. One often overlooked area where this has had perhaps the most profound impact is on the industrial sector. There is no hotter sector in commercial real estate today than industrial, and it’s not even close. Industrial is sizzling, and this is in significant part due to the impact of eCommerce, which represents 30 percent of all industrial leasing nationwide since 2012. Few areas of the country are impacted by this more than New Jersey, which today stands as the nation’s fourth largest industrial market.

Consider: in 2011, Amazon occupied 0 SF in New Jersey; today they occupy 10.3 MSF. In 2014 Jet.com occupied 0 SF; today they occupy 1.0 MSF. And in 2015 Wayfair occupied 0 SF; today they occupy 3.0 MSF. That’s more than 14 MSF just between three eCommerce companies, and just in New Jersey alone.

This phenomenon is not merely impacting the physical occupancy of industrial sites, but is having a dramatic influence on the way in which they are built. Distribution centers require higher ceiling heights (40’ clear and higher) to allow for more products, mezzanine levels, the ability to accommodate more employees, etc. This is one reason why Cushman & Wakefield is so successful in advising our industrial clients, because we have the resources beyond brokerage, including project management and other occupier services, who can help navigate these challenges.

eCommerce will continue to grow, and it will continue to eat into the share of total retail sales in the United States and worldwide. But the idea that bricks-and-mortar is dead is naive, and its trajectory is sure to level off. The reality is, the retailers who are best poised to succeed are those who develop the perfect omnichannel balance, offering the right in-store experience, online shopping capabilities, and even embracing the growing technologies available at the physical location, like the smart mirrors being tested at retailers like Bloomingdale’s, Neiman Marcus, and Nordstrom, which suggest shoes and accessories for the garment you try on. For the retailers who achieve this balance, that a sale occurs is important. Where it occurs is not.

One final point deserves mentioning. Most of the discussion in retail today is how bricks-and-mortar stores can survive in the age of eCommerce, but the reality is that few eCommerce-only companies cannot survive on their own. Much of this is due to the pressure placed on the business both by Amazon’s volume and their capabilities. Challenges like return goods rates, restocking approaches, and last mile delivery strategies may be too cost-prohibitive for eCommerce companies, and so their success and endurance will rely upon finding the balance between their online and physical presence. It is for this reason that so many pure eCommerce players are opening physical locations, including Harry’s, StubHub, Warby Parker, Casper, and others.

If anywhere is well suited to weather the storm of change sweeping through retail today it is New York City. In spite of the rough patches that many retail markets in New York are experiencing, the city will always be identified with shopping. Fifth Avenue is likely the most identifiable high street destination in the world. From 49th to 60th Streets, the premium shopping corridor along Fifth Avenue, even as vacancy rates have gone up, asking rents continue to climb. This is a sure indication that investors understand that this bump in the road is just that, a bump, rather than the precipitous drop that some would have us believe.

A holistic approach will be required. The retailers who are best able to adapt, which includes the ability to develop and manage a sound and comprehensive real estate strategy, will be poised for success. We can expect to see more mergers and acquisitions as part of this strategy, where eCommerce companies purchase bricks-and-mortar businesses in order to expand their platform (see Amazon’s acquisition of Whole Foods), and traditional retailers sweep up eCommerce startups to help catch up their technologies (see Walmart’s purchase of Jet.com and Bonobos).

All of these trends continue to bode well for the industrial sector, and competition in the industrial space is only going to increase. No matter how the perfect balance plays out, distribution centers will be at the center of it, and industrial space will remain at a premium. And while we don’t want to paint too rosy a picture when it comes to retail real estate, the ubiquitous doom-and-gloom predictions we believe are off base. More changes are still to come, significant changes no doubt. But a holistic approach will be required. The retailers who are best able to adapt, which includes the ability to develop and manage a sound and comprehensive real estate strategy, will be poised for success.

Joanne Podell has been a a leading provider of New York retail commercial real estate for 25 years, with an outstanding record of accomplishment. She has represented some of the most prestigious brands in the business, including Nike, TD Bank, Ann Taylor, LOFT, H&R Block, and many more. A two-time recipient of the prestigious REBNY “Deal of the Year” award, Ms. Podell was declared Cushman & Wakefield’s 2016 global top broker, the first time that a retail broker has been the sole recipient of such a recognition. Ms. Podell is an active member of Cushman & Wakefield’s women’s networking organization, Artemis, and devotes a significant amount of time to both charitable organizations and professional mentoring programs, particularly recognizing the challenges that women face coming up in the commercial real estate industry.

Stan Danzig, Vice Chairman, has been at C&W for over 36 years and has consistently been a leading producer in Industrial Brokerage Service Line. He has represented some of the best known corporate users and developer/investors in acquisition, disposition and land sale transactions.